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Weekly Column

Mail free or die: How and why AOL will probably be a casualty in the Internet war

Status: [CLOSED]
By Robert X. Cringely

Sometimes the world changes and nobody notices right away. The change is subtle at first, and the hint that change has even happened can be subtler still. But the change is real, and our world is forever different because of it. We've all known such personal changes (mine came in the back of a '56 DeSoto) and we've known them as a culture, too (the Tonkin Gulf Resolution, arrival of the AIDS virus, and the McDonald brothers' invention of hamburger science all seemed minor events in their time). Well, it happened again this week when word leaked out that this fall, Thomson would introduce the first commercial version of Oracle's Network Computer.

But here's the part where we miss the very history happening around us. The facts that Thomson will introduce these machines for Christmas at less than $350 and that they'll work with regular PC peripherals isn't important. No surprises there. The world was changed not by the story, but by where the story first appeared.

Variety, the show business trade paper.

In an editor's spur-of-the-moment decision, computers truly entered the mainstream. Variety. Next we'll have hardware troubleshooting tips in the Farmers' Almanac. Debates about imagining standards will run in the New Republic. The tectonic plates have shifted and it's important to remember they never shift back.

This trend of computing becoming more and more a part of the American lifestyle comes with a thousand hints. Next year, Internet usage of the phone system will exceed voice usage. The richest man in the world is a nerd. My mother has an e-mail account. Hell, just look at this column, which couldn't even exist in a world without millions of people online.

All the implications of this shift aren't yet clear, but I can tell you it is already running along several axes at once. At the same time Hollywood is fixating on Silicon Valley, the online world is quietly redefining itself, with obvious winners and losers emerging. And while I can't tell you who the winners will be, I can sure point to the losers -- the traditional online services. In five years they will all be dead, even America Online. Remember, you heard it here first.

The subtle clue that this transition is happening is the recent arrival of all this free electronic mail. Hotmail, rocketmail, excitemail, cringelymail, every company seems hot to give us free lifetime e-mail boxes accessible through the web. Why?

Free e-mail is just part of the massive redefinition of what it means to be an online service on the World Wide Web. An online service used to be connectivity+content+navigation+community all vertically integrated and packaged in a closed network. AOL, Compuserve, Genie, and Prodigy all work this way. Then along came the Internet and the equation began to change. Now connectivity is available anywhere for a flat rate. Content is already on the Net (an open network).

What this means to traditional online services and to wouldbe Internet online services is very different. If connectivity and content are available essentially for free, then the traditional services are at a disadvantage for having to produce it themselves. Notice how fast Sompuser's family-oriented WOW network died? This is the reason.

In order to survive, the traditional online services will have to drop their proprietary connections and content.

At the same time, there is a new breed of online services growing up from the Web. These folks, typified by Yahoo, Excite, and Four11, are driven by the last half of the equation -- navigation + community.

Look at Yahoo and Excite. They've always gone for navigation (search, channels, etc.). They've been beefing up their community tools (the largest bulletin boards on the Web, chat, instant messaging, and now e-mail). Given that on AOL more than 60 percent of people's time is spent in community oriented things, its an important part of their strategy. Because no matter whether they pretend to be allies with AOL, AOL is the enemy to these outfits.

These new guys are all seeking 'virtual subscribers.' It's not just about page views anymore, its about loyal customers who've formed a relationship with a free e-mail provider, giving up in the process some piece of data about themselves. E-mail is a perfect tool for that. A huge percentage of the people who sign up return on a daily basis. E-mail is a great relationship builder.

So why does this mean AOL will die? What's really interesting is that when I ran this column past some friends, nobody questioned the inevitable death of any online service except AOL. As far as the public is concerned, Compuserve and Prodigy are already dead. Assuming that's true, let's deal with the plight of AOL.

AOL is like Apple, doomed to pay for R&D that competitors get almost for free. That's why Apple's profit margins will never be as high as Compaq's, even though Compaq is in what looks more and more like a commodity business. Well, Internet access is already a commodity business, and AOL's decision to pull back from unlimited usage shows they ran the numbers and don't see it's possible to go head-to-head against pure Internet providers and still support AOL's traditional stock price-to-earnings multiples. If AOL stays in the Internet access business, it will have to cut costs and get out of the content business. If AOL decides to stay in the content business, it will have to drop access. Either way, AOL is changed forever.

Unburdened by an expensive network or the need to create lots of content beyond indices and Web reviews, the Yahoos and Excites will be hard to stop. Their only real compeitors, in fact, are Microsoft and Netscape, which have the added advantage between them of pretty much owning the software platform. Netscape gets more revenue from selling space on its homepage than it gets from selling client software. Make no mistake: both Netscape and Microsoft are in the media business. While Yahoo and Excite target AOL, Microsoft and Netscape fight it out. But in time both groups will turn on the other and the landscape will change yet again.

When elephants dance, the grass is trampled.

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